S. Korean economy faces sluggish domestic demand: gov't report

The South Korean economy is facing sluggishness in domestic demand despite low headline inflation, a government economic report showed Tuesday.

"Recently, our economy saw continued growth in employment, but consumer price inflation slowed on lower oil prices," the Finance Ministry said in its monthly economic assessment report "Green Book."

Positive signs were detected in consumption and investment sentiment, but major economic indicators showed a big fluctuation, indicating non-solid recovery in domestic demand, the report said.

Low headline inflation tends to cause stronger consumption demand, but domestic demand remained faltering, indicating lackluster sentiment among consumers.

Consumer price inflation stayed below one percent for three straight months, boosting worries about deflation. The consumer prices rose 0.5 percent in February from a year earlier, marking the lowest in about 16 years.

When excluding the effect from tobacco price hike, which lifted the headline inflation by 0.58 percentage points last month, the consumer prices actually declined in February.

Production for all industries reduced 1.7 percent in January from a month earlier, the largest monthly slide since March 2013. Output in the mining and manufacturing sectors retreated 3.7 percent in January, posting the worst figure since December 2008.

Private consumption dipped 3.1 percent on-month in January, and facility investment tumbled 7.1 percent in the month.

Finance Minister Choi Kyung-hwan said on March 4 that he "has much worry about deflation concerns" caused by the prolonged disinflation, noting that the prolongation of low headline inflation would weaken sentiment among economic agents such as consumers and companies.

The report also expressed concerns about external uncertainties, including the earlier-than-expected rate increase in the United States, weak Japanese yen and economic turmoil in oil-producing countries.

Better-than-anticipated employment data in the United States triggered expectations that the U.S. Federal Reserve may raise its benchmark interest rate as early as June, after maintaining it between zero and 0.25 percent since 2008.